The Federal Reserve System: Purposes and Functions

gage-backed securities guaranteed by federal agencies as collateral for its repurchase agreements.

Table 3.5

Federal Reserve System temporary transactions, 2001–2004

Volume in billions of dollars

Reverse repurchase agreements2

1.Includes all types of repurchase agreements.

2.Reverse repurchase agreements after 2003.

Reverse Repurchase Agreements

When the Federal Reserve needs to absorb Federal Reserve balances temporarily, it enters into reverse repurchase agreements with primary dealers. These transactions involve selling a Treasury security to a primary dealer under an agreement to receive the security back on a specified date. As in repurchase agreement transactions, these operations are arranged on an auction basis. When the Federal Reserve transfers the collateral (usually

a Treasury bill) to the dealer, the account of the dealer’s clearing bank at the Federal Reserve is debited, and total Federal Reserve balances decline. When the transaction unwinds, the account of the dealer’s clearing bank is credited and total balances increase.

Every business day, the Federal Reserve also arranges reverse repurchase agreements with foreign official and international accounts. These institutions have accounts at the Federal Reserve Bank of New York to help manage their U.S. dollar payments and receipts. The Federal Reserve permits these institutions to invest cash balances overnight through these agreements.

A Typical Day in the Conduct of Open Market Operations

Each weekday, beginning at around 7:30 a.m., two groups of Federal Reserve staff members, one at the Federal Reserve Bank of New York and one at the Board of Governors in Washington, prepare independent projections of the supply of and demand for Federal Reserve balances.

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